May 2004

Published on May 4, 2004

Few items have received as much attention in Lansing during
the last 18 months than the state of Michigan’s budget. Faced with a yawning
gap between revenues and proposed state expenditures last year, Governor
Granholm sealed a budget deal that addressed the Fiscal Year (FY) 2004 deficit
without a general hike in taxes. Unfortunately, the state is facing another
billion-plus dollar deficit in FY 2005 and there is serious talk about
substantial tax hikes to maintain high spending. Such tax increases are not
necessary. There is plenty of room to cut the state budget again or raise
revenues through "one-time" sales of state assets. A few ideas follow.

Auction Racino Licenses

At the same time state lawmakers grapple with a $1.3
billion budget deficit, they are planning to give away assets that could be sold
instead for as much as $1.6 billion.

Legislation to expand gambling in Michigan (HB 4610) would
effectively give away licenses to for-profit operators of newly allowed "racinos,"
which are video lottery terminals at horse racing tracks. Similar gambling
licenses have sold elsewhere for hundreds of millions of dollars.

Selling racino licenses could wipe out the expected 2005
budget deficit without raising any taxes, with about $300 million left over for
the rainy day fund or other spending. Experience in Michigan and elsewhere
shows that private investors are willing to pay for the right to operate
gambling machines.

Under the legislation, racinos could be permitted at
Michigan’s seven existing and four or more proposed racetracks. An additional
racino at the state fairgrounds could be permitted as well.

Jeff Hooke, a Maryland-based investment banker and author
of several studies on the value of gambling licenses, reports that in 2000 a
Michigan Indian tribe paid $265 million for a 40 percent interest in a Detroit
casino license. Last March, the state of Illinois auctioned a casino license
for more than $500 million. The Mackinac Center and Hooke estimate that
licenses to run video lottery terminals at 12 Michigan tracks could be worth as
much as $1.6 billion if auctioned off to the highest bidders. Their figure
factors in the effect of future gambling taxes paid by the operators.

William Thompson, University of Las Vegas, Nevada is
professor of Public Administration and author of the "Gambling in America: An
Encyclopedia of History, Issues, and Society" and "Legalized Gambling: A
Reference Handbook" has said that not auctioning off licenses "would be foolish
of Michigan."

Gambling is no substitute for genuine economic
development. But if the state insists on being in the gambling business, it
shouldn’t give away assets for free, especially when job-destroying tax
increases are on the table.

Although it would be tempting to auction the licenses off
and use the sale revenue as a one-time solution for this year’s budget deficit,
such a move may not be the best option. The Mackinac Center for Public Policy
recommends using "one-time" revenue increases — from the sale of state assets,
for instance — to change the basic structure of Michigan’s budget. For
instance, lawmakers could use proceeds of any asset sale to pay down Michigan’s
General Obligation Debt, which currently exceeds $1 billion. The advantage in
eliminating debt is that it will save the state money each year. Paying it off
would save Michigan approximately $78 million in annual principal and interest
payments through 2021 (assuming a 3.5 percent interest rate as Treasury
does).
[1]

Securitize Tobacco Settlement Money

Securitization of tobacco settlement revenue is an option
worth exploring. In order to cope with their own deficits other states have
"securitized" the stream of revenue that they had expected to receive from the
national tobacco settlement. In other words, states sold the right to future
tobacco settlement payments. Michigan may wish to do the same. The tobacco
settlement requires annual payments to states in perpetuity, but estimates of
the settlement’s total value often assume income for the years 1998 through
2025. Through those years, Michigan’s total settlement is worth $8.5 billion.
Securitizing even a portion of this total revenue could result in billions of
revenue generated in one-lump sum payment, or several payments, to the state.

It is worth nothing that this is not an elegant solution to
the state’s fiscal woes. As in most policy discussions officials must examine
the costs and benefits. Do the benefits outweigh the costs — including the
perceived risks — of selling tobacco settlement money? For the purposes of this
study the Center will not estimate the value of securitizing its tobacco
settlement revenue. It will instead recommend the idea for further study and a
redirection of annual tobacco settlement payments away from its current uses and
toward the General Fund. This will increase money available to balance the
budget by approximately $300 million. This could necessitate ending programs
that the revenue currently funds such as the "Michigan Merit Award Program," and
life sciences initiative. For more on the life sciences initiative, see page
75. For purposes of calculating total savings the Mackinac will use the figure
$281,992,400, which was the total Tobacco Settlement Appropriations in Fiscal
Year 2004.

State Land

The Mackinac Center for Public Policy has also recommended
selling off the state fairgrounds and the Ralph A. MacMullan Conference Center.
We repeat this recommendation in the pages of this study, but find it prudent to
cite it here because these properties could also be used to generate a
"one-time" source of revenue exceeding $69 million. These revenues too could be
used to pay down debt. For more on the sale of these properties, see pages 10
and 82, respectively.

School Aid Fund

The state school aid budget funds Michigan’s Kindergarten
through 12th grade education system. The School Aid Fund is
comprised of federal, state, and local funds and is expected to have close to
$16 billion in funds in FY 2005, $11.2 billion of which comes from state
sources. One source of funds is the General Fund/General Purpose budget. Last
year, the state appropriated a $327 million subsidy from GF/GP to the School Aid
Fund. To Governor Granholm’s credit, her proposed budget reduces this subsidy
by $146 million. The legislature should eliminate the subsidy entirely.

School Savings

The legislature could help school districts save money to
offset any such cuts by making some fundamental changes to Michigan law. For
instance, Mackinac Center for Public Policy analyst Paul Kersey has recommended
repeal of Michigan’s Prevailing Wage Law of 1965 —
which would translate into savings of more than $400 million dollars every year,
$150 million of which would accrue directly to schools.

The prevailing-wage law applies
whenever state funds are used on the construction, renovation or repair of
buildings or roads. Under this law, workers must receive the wage typical of
those doing similar work in the community. In Michigan this is uniformly taken
to mean the higher wages set in local collective bargaining (union) agreements.

As the Mackinac Center for Public Policy reported in the
late 1990s, school construction in Michigan is on the order of $1.5 billion
annually, or close to $900 per pupil. Because of the Prevailing Wage Act, these
costs are substantially greater than they need to be. In a study for the
Mackinac Center for Public Policy, Professor Richard Vedder of Ohio University
found that the law increased construction costs by at least 10 percent. In 1997,
the Ohio Legislature exempted schools from that state’s prevailing wage law —
saving schools an average of 10.5 percent in construction costs, according to
the nonpartisan Ohio Legislative Budget Office.

If Michigan were to follow Ohio's lead, our schools would
save at least $150 million annually — a figure that amounts to roughly $90 for
every student in the state.

More Taxes Not Needed

Lawmakers need not raise taxes to pass a balanced budget
for Fiscal Year 2005. Many alternative options exist. Legislators could sell
off assets for a single-year solution to our overspending woes, or they could
take adopt (or adapt) any number of the more than 90 recommendations made
throughout the 2nd edition of this budget study and addendum.

If legislators insist on raising taxes, however, then they
should be prepared to recommend to Michigan families where to cut their
household budgets to keep state spending at its high level. Should families buy
less health care? Should they buy fewer diapers and less food for their
children? Should they buy fewer books, or stop paying their utility bills?
Should they patronize restaurants less often? Should taxpayers work more
overtime? These are choices people will face if the state refuses to cut
spending or sell certain assets.

The people who pay the bills of government deserve a
legislature that will scrutinize every aspect of state spending, preserving only
those that are truly necessary and cost effective.